Indeed, after having measured the carbon footprint of their investments, investors have to engage their investee companies on reducing their greenhouse gas emissions. Reducing greenhouse gas emissions should be the number one objective, but offsetting can be a valid additional option.
To answer the specific challenges raised by offsetting mechanisms, investors willing to either engage corporates on their carbon offsetting strategy, or to set up carbon offsetting mechanisms for their investment funds, can consider the adoption of principles and best practices.
In this context, we see the Oxford Principles for Net Zero Aligned Carbon Offsetting released in September 2020 as a useful reference. It provides a list of recommendations to avoid risks associated with existing offsets, and to ensure that offsetting ultimately positively contributes to achieving net zero as early as 2050.
|The Oxford Principles for Net Zero Aligned Carbon Offsetting
|Principle 1 Cut emissions, use high quality offsets, and regularly revise offsetting strategy as best practice evolves.
Principle 2 Shift to carbon removal offsetting.
Principle 3 Shift to long-lived storage.
Principle 4 Support the development of Net Zero Aligned Offsetting.
When engaging with corporates, we believe it is key to:
1. Make it clear that companies should first take actions to deliver real emission reductions on their own business scope (including scope 2 and 3 whenever relevant) and seek alignment with 1.5°C-consistent reduction pathways. In order to best accompany companies in their greenhouse gas reduction journey, this implies that responsible investors must have a good grasp of Paris aligned/net zero scenarios. Only in this way will they be able to question and challenge companies’ emissions reduction targets and strategies. For instance, investors may question the share of carbon offset in companies’ strategies to ensure their decarbonization roadmaps are Paris-aligned. This is consistent with the position of the SBTi for target certification: “Offsets are only considered to be an option for companies wanting to finance additional emission reductions beyond their science-based target (SBT) or net-zero target”. The parallel reasoning for an investment fund is that offsetting should only complement engagement efforts. In other terms, it is better reducing emissions than trying to capture or offset them.
Does the SBTi accept all approaches to reducing emissions?
The SBTi requires that companies set targets based on emission reductions through direct action within their own boundaries or their value chains.
Offsets are only considered to be an option for companies wanting to finance additional emission reductions beyond their science based target (SBT) or net-zero target.
Avoided emissions are also not counted towards SBTs.
SOURCE : HTTPS://SCIENCEBASEDTARGETS.ORG/ FAQS#DOES-THE-SBTI-ACCEPT-ALL-APPROACHES-TOREDUCING-EMISSIONS
2. Seek transparency on how the offsetting strategy is accounted for. Whereas carbon emissions reporting has significantly improved over the decade thanks to standardization efforts of the GHG Protocol for instance, offsetting brings new challenges. In particular, corporates and investment funds should be clear on the scopes covered by their reported emissions and whether these emissions are communicated net of offsetting. Other valid questions are: Is the same accounting rule applied to reduction and removal credits? How much does a corporate’s carbon reduction target rely on offsetting mechanisms, and does the corporate account for offsets used by its suppliers or customers in reported scope 3 emissions data? How does the investment fund account for the share of financed emissions and are the underlying corporates’ emissions data already net of offsets?
3. Get a strong visibility on the high environmental integrity of the offsets used: With observed prices of voluntary carbon credits averaging $3/tCO2e, we can easily question the robustness of some carbon offsetting solution proposals. Corporates and investment funds should be transparent on their offset selection criteria and apply high standards. This includes integrating “do no significant harm” principles for other social and environmental issues in their project assessment, avoiding project types or location with high risk of non-additionality, and tackling permanency issues in their offsetting strategy. Information such as 1) the average price of credits sourced, and 2) the percentage of credits retained as eligible out of the offers received, can help investors to sense the level of stringency of the selection criteria compared to market practices. A US tech company stated that it retained only 1% of credits offered by brokers, for instance. Regarding the permanency issue, robust project monitoring (e.g. satellite images) combined with building a buffer quantity of credits appear as best practices in our view. An oil major for instance intends to keep a 10- year stock of offsets as a buffer. Setting up a long-term sourcing strategy for quality offset credits, possibly through direct investments in selected projects or commitment to buy credits from a project on a forward basis, can provide assurance that sourcing will not be disrupted as competition increases in the market.
For corporates, compensating their own carbon emissions with removal credits is more straightforward from a ‘net zero’ accounting perspective than for reduction offsets. This supports the idea of gradually shifting to carbon removal offsetting.
The offset permanency issue is valid whatever the use case though and in the absence of clearer market recognition (such as the CDM temporary credits), shifting to long-lived/ permanent storage solutions (e.g. Carbon Capture and Storage) should be considered in order to limit risks of reversal. This could help the development of these long-term CO2 abatement solutions that have so far lacked adequate policy support, such as high carbon prices.